America’s inflation rate cooled to 2.4% in January 2026, its lowest reading since May 2025 and a welcome drop from the 2.7% rate recorded in the prior two months. This decline came in below forecasts of 2.5%, suggesting price pressures are easing more quickly than economists expected.
The softer inflation numbers strengthen the case for a potential interest rate cut next month. Core inflation, which excludes volatile food and energy prices, fell to 2.5% in January from 2.6% previously. That marks the lowest core reading since March 2021, a milestone that gives the Federal Reserve more room to contemplate lowering rates.
Monthly price changes paint a similar picture. The Consumer Price Index rose just 0.2% in January on a seasonally adjusted basis, with headline inflation climbing only 0.17% from December to January. Food prices crept up a modest 0.19% during that period, while energy prices actually dropped 1.47%, providing some relief at the gas pump.
Looking ahead, projections suggest this cooling trend may continue. Nowcast models predict February’s annual inflation will tick down to 2.39%, with core CPI holding steady around 2.46%. The first quarter of 2026 shows similar expectations, with CPI nowcasts pointing to 2.48% and core CPI at 2.50%. These projections could influence market expectations about the Federal Reserve path for policy.
Not everything is slowing down, though. Shelter costs remain sticky, rising 3.2% annually compared to 3.0% in the previous period. Monthly shelter prices climbed 0.4% in the latest report, reminding renters and homeowners that housing inflation persists even as other categories cool.
The broader economic picture offers additional context. The PCE price index, another key inflation measure favored by the Federal Reserve, increased 2.9% in the fourth quarter of 2025. Core PCE stood at 2.7%, down from 2.9% in the third quarter, marking gradual progress toward the Fed’s 2% target. For the full year 2025, the PCE price index rose 2.6% annually.
With inflation trending downward and core measures reaching multi-year lows, financial markets are betting that policymakers will feel comfortable cutting rates soon. The January data certainly makes that outcome look more probable than it did just a few months ago. Today’s figures stand in stark contrast to the sustained elevated inflation of 2022, when monthly values reached as high as 9.06%.
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